The launch of the Bill to legislate for the Lifetime Isa has been met with fears that the new product will be beset with charges and penalties that could make it unattractive and complex to customers.
The Savings (Government Contributions) Bill published earlier this week proposes the Government contributes 20 per cent of the initial investment but then charges an exit fee of 25 per cent on the entire fund including all investment growth. This penalty could add up to 45 per cent of all investment growth says AJ Bell, which has criticised the withdrawal fund as overly punitive and is calling for it to be amended.
Meanwhile providers are pointing out that the potentially short-term nature of the product for those using it for house purchase means pension levels of charges will not be possible to achieve.
While the product will be welcomed by consumers, and offers attractive incentives to certain groups, the complexity of identifying where it is more suitable than pension may put some employers off from offering it as an alternative to pension.
Government top-ups of 25 per cent a year will be given on contributions of up to £4,000 a year up to age 50. The fund balance is tax-free from age 60, in cases of serious ill health or to buy a first home, but subject to a 5 per cent charge on the entirety of the fund, plus the return of the bonus where withdrawn before then.
Where funds are used to purchase a first home, savers will be better off by using the Lisa, because of the Government bonus. But the situation is more complex for those retaining the cash until retirement who could have opted for pension instead.
Figures from Willis Towers Watson show that where the cash is left until retirement, the Lisa top-up will work out the same for a basic rate taxpayer who pays no tax in retirement. Where pension withdrawals would attract 20 per cent tax, the pension regime equates to a 6.25 per cent uplift after the tax-free lump sum is accounted for, leaving the Lisa’s 25 per cent top-up as a clear winner.
But for a 40 per cent taxpayer who expects to pay 20 per cent tax in retirement, pensions tax relief equates to 41.67 per cent relief, beating the 25 per cent on offer through a Lisa.
National Insurance relief on employer pension contributions makes pension a more attractive option for an employee paying basic rate tax both in work and in retirement, with £1,000 spent by an employer providing £850 of disposable cash in a pension, compared to £747 through a Lisa.
For anyone needing to withdraw the assets before 60 for reasons other than the prescribed tax-free options, the Lisa works out very expensive.
AJ Bell calculates that if someone contributed the maximum £4,000 over 10 years they would build up £50,000 in contributions, of which £10,000 would be Government contributions. Assuming growth of 4 per cent per annum after charges the fund would be worth £62,432.
The 25 per cent exit charge on £62,432 would total £15,608. This returns the Government contributions of £10,000 plus £5,608, which equates to 45 per cent of all investment growth generated over the period, leaving the investor with £46,824.
Aviva head of corporate pensions Dominic Fryer says: “We are finding employers are very lukewarm to the Lisa. They are concerned about whether employees will understand what it could mean for them. Paternalistic employers feel that if they do offer it, they will need to fully explain how it compares to pension, which will not be a straightforward message to deliver. The question therefore is does a provider build a workplace product or an individual one. Then one has to consider that for people buying a house this will typically be five-year business, so pricing will not be as keen as for workplace pensions.”
Willis Towers Watson senior consultant David Robbins says: “If there is a good chance you will leave the money invested then there are scenarios where the Lisa is a good deal. But if there is a chance you will need the money and you end up withdrawing, it is expensive. But that said, it is a good new addition, as people like the nudge to help them tie their money up for the long term.”
AJ Bell senior analyst Tom Selby says: “Although the Government bonus has been positioned as 25%, it only equates to 20 per cent of the investment being made. A 25 per cent exit charge on the whole fund, including investment growth, therefore has a disproportionate impact on the end value an investor would be left with.
“We’d like the Government to reconsider the level of the early exit penalty before the product is launched in April 2017 and ensure it is set at a level that enables the Government bonus to be recouped, plus investment growth on that bonus, but does not eat into the investment growth achieved on the individual investor’s personal contribution. If it doesn’t, investors will have to be very sure that they will not need access to their savings for reasons other than a house purchase before locking funds into a Lisa.”
Wealth at Work director Jonathan Watts-Lay says: “Pensions should, of course, remain an integral part of saving. Yet other choices such as the Lisa should not be seen as a threat, as they may in fact encourage people to develop a savings habit which ultimately could benefit pension savings. After all, the Lisa is a great option for those who want to save for a deposit on their first home due to the guaranteed bonus.
“However, employers will need to think about how they can support employees who all want to save in different ways. For example, we already see many companies giving employees a percentage of their salary to buy ‘benefits’ so could this be a method of funding the Lisa in the future?”
“Whether employees decide the Lisa or another savings method is right for them, the need for financial education, guidance and advice has never been more apparent.”